After the quite some wide swings on Tuesday and Wednesday, the EUR/GBP pair had found some kind of equilibrium too. The pair settled yesterday in a sideways trading pattern close to the 0.8100 big figure. There was too little in the way of hard news to push the cross rate away from this pivot. After the close of the European markets, UK Finance Minister Osborne announced a new scheme to support credit availability for the UK economy. At the same time, the BoE will also activate its Extended Collateral Term Repo facility.
The BoE governor indicated also that the case of further easing was growing. Sterling lost a few ticks on the announcement, but the impact was very limited. EUR/GBP closed the session at 0.8118, compared to 0.8098 on Wednesday evening.
The downgrade by Moody’s of Spain overnight had not much impact on the Bund (see below for impact on Spain/Italy) and neither had a successful Italian auction. An initial attempt to rally petered out fast after which listless sideways trading dominated. Sentiment turned a bit more bond friendly in the afternoon session and got some help of higher-than-expected claims.
The bad news show started overnight as Moody’s downgraded the country by three notches to Baa3, at the brink of falling into junk territory. At the start of the European session, data showed that the decline in Spanish housing prices accelerated. Not much later, Bank of Spain data revealed that the borrowing of Spanish banks from the ECB increased again (new record amount) and from then on, it was every man for himself. The Spanish 10-yr yield set a new euro lifetime high and fell shy of breaking the 7% mark (6.998% according to BB data). Italian bonds at first suffered as well but the damage was undone after Italy managed to sell €4.25B BTP’s (maximum of target; see below). At the end, the Italian 10-yr spread decreased by 8 bps to 464 bps.
Today, we might get a quiet trading session ahead of this weekend’s Greek elections. The outcome of the election is unpredictable. The latest polls date from two weeks ago and showed that the conservative New Democracy party (winners of the May 6 elections) and the leftist SYRIZA party went head-to-head. Whatever the outcome, we think it will still prove difficult to form a government. If a government is formed, whether it is led by ND of SYRIZA, one of the first things it will do, is renegotiating the EU/IMF Memorandum deal. The approach of SYRIZA will be more drastically (reversing earlier decisions etc.) then ND (eg delaying targets). From then it is up to Europe. Euro zone ministers will hold a conference on Sunday to discuss the outcome of the elections and weigh their options.
Yesterday, G20 sources also indicated that central bankers are preparing for coordinated action after the Greek elections if needed. The UK calendar contains the trade balance figures. In the current environment, we expect any market reaction to this report to be only of intraday significance, at best. It will all be about positioning ahead of the Greek elections. In theory, the prospect for more unconventional policy stimulation should be negative for the sterling. However, in the current environment, this is not a priori the case. The UK still has the luxury to have a central bank that can act in a rather flexible way. It is still far from sure that the policy respects of the BoE will work over time. However, with the market be on the eve of a potential hurricane, this policy flexibility might be seen as an asset. So, short-term we assume that sterling might remain well bid, especially against the single currency.
From a technical point of view, EUR/GBP cross rate is showing a temporary consolidation after sell-off since February. Early May, the key 0.8068 support was cleared. This break opened the way for a potential return action to the 0.77 area (October 2008 lows). Mid May, the pair set a correction low at 0.7950. From there, a rebound/short squeeze kicked in. Continued trading above the 0.8095 area (gap) would call off the downside alert. A first attempt to do so was rejected last week. The pair tried several times to regain the 0.8100 area early this week, but there were no follow-through gains yet. We still prefer to sell into strength for return action lower in the range.